Decision on next Fed chief a rare political fight

By: The Associated Press August 22, 2013Comments Off on Decision on next Fed chief a rare political fight

Still, analysts say they’d be surprised if Summers, as Fed chairman, strayed from the Bernanke-Yellen approach. Republicans have often attacked Bernanke’s low-rate policies by arguing that rates kept too low for too long could destabilize markets and trigger high inflation.

Where Yellen and Summers might differ is on regulation. The Fed is charged with overseeing the nation’s biggest banks and implementing stricter rules imposed by the Dodd-Frank Act, which aims to curb the abuses that helped ignite the 2008 crisis.

Both have backed tighter regulation. But Summers’ critics argue that he’s established ties to big banks and might be overly sympathetic to their priorities. After leaving the Obama administration after 2010 and returning to Harvard to teach, Summers has been a paid consultant for financial institutions including Citibank.

And as Treasury secretary, Summers backed legislation that erased boundaries between commercial and investment banking. Critics believe that change let banks make riskier bets that led to the crisis.

Shelia Bair, former head of the Federal Deposit Insurance Corp., has endorsed Yellen. “She was not part of the deregulatory cabal that got us into the 2008 financial crisis,” Bair wrote in a commentary.

Summers’ supporters say his thinking on deregulation has evolved since the crisis. They note that he supported tighter rules that ended up in Dodd-Frank.

“Larry was strongly supportive of our efforts to put tough new rules in place to reform the financial sector and protect consumers,” said Michael Barr, a law professor at the University of Michigan, who as an assistant Treasury secretary helped craft the Obama administration’s response to the 2008 crisis.

His allies also contend that a Fed chairman with experience on Wall Street, like Summers, may be better equipped to monitor it.

Analysts don’t expect any reversal of the tighter regulation brought by Dodd-Frank — whether Summers or Yellen is chosen to lead the Fed.

“The memories of the crisis are too fresh for a change,” said Brad Hintz, banking analyst at Sanford C. Bernstein & Co.

This summer, about a third of Senate Democrats signed a letter urging Obama to choose Yellen. When the president was pressed by congressional Democrats about a possible Summers chairmanship, he defended him. Obama said the criticism of Summers struck him as an example of someone “getting slapped around in the press for no reason” before any nomination.

The decision may come down to which person Obama feels most comfortable with. That edge could go to Summers, given his long-standing relationship with the president.

Then there’s the gender issue. A Summers pick would mean Obama had bypassed someone who would have broken a barrier if she’d become the first woman to lead the Fed. It would also mean he had chosen someone who upset women when he questioned their innate skills in math and science — comments that contributed to Summers’ forced resignation as Harvard’s president in 2006.

While Yellen is credited with building consensus as head of the San Francisco regional Fed bank and then on the Fed’s board, Summers has gained a reputation for being brusque and too eager to force others to accept his views. That holds the potential for disunity on the 19-member Fed committee that sets rate policies.

Obama has said he’ll make his decision in the fall. He’ll then face the prospect of resistance from Senate Republicans who have grumbled about the Fed’s low-rate policies. Bernanke was approved by the Senate for a second four-year term in 2010 despite 30 negative votes — the most ever received by a nominee for Fed chairman.

Any sign that a confirmation might be in jeopardy could spook investors.

“If politics gets in the way of confirmation of the president’s choice, then we could see a major undermining of market confidence,” said Diane Swonk, chief economist at Mesirow Financial.